Businessweek Archives

Overhaul In Japan

December 20, 1992

Industries

OVERHAUL IN JAPAN

Production manager Koichi Yohroh tilts his hard hat and strides down the gleaming flexible assembly line at Mazda Motor Corp.'s Hofu plant near Hiroshima, pointing out all the machinery that $500 million can buy. Robotic arms insert an engine and suspension unit up into a Eunos 500 body that's moving along the line. The car, which is sold in Europe, spins 90 degrees, and robots attach the preassembled instrument panel. The line can juggle 12 different models, and it showcases a quiet, people-friendly workplace. Even the revolver-shaped electric screwdrivers are muffled, Yohroh notes, revving one up.

Lately, however, there's a note of melancholy in this flawless metallic ballet. Since opening the Hofu factory in February, Mazda has had to cut production to one shift from two. Worse, a lack of cash, plus simultaneous slumps in the world's major car markets, have forced the company to cancel its planned Amati luxury sedan, which was to have been built on the line starting next year. Today, the plant is running at just one-third of capacity. "We expected markets to keep expanding," laments Mazda Executive Vice-President Makoto Miyaji. "We're not used to this."

MATURE MARKETS. Welcome to the real world, Japan. Since before the first Toyota Crown hit U.S. showrooms in the late 1950s, Japanese auto sales have followed one trajectory: up. But suddenly, in boardrooms and factories all over Japan, executives are grappling with how to eke out gains in a market that, for them, seems to have shifted into low gear. "There's no straight stretch anymore," frets Nobuhiko Kawamoto, president of Honda Motor Co. "We're facing matured, low-growth markets for the first time ever."

Here's the dilemma he and others see developing: A saturated home market plus political opposition will slow expansion in the U.S. and Europe, while growth in smaller markets such as Asia and Eastern Europe won't be enough to pick up the slack. Meanwhile, says Nissan Chairman Yutaka Kume, Detroit is "narrowing the competitiveness gap" in the U.S., Japan's biggest foreign market. As a result, Japanese analysts figure, their industry's revenue growth will drop to 2% or 3% annually in the next few years, from up to 10% in the late 1980s. Suddenly, once confident executives have doubts about how to respond. "Before, when I had money in my pocket, I knew exactly what to do--buy more equipment, keep on growing," says Kawamoto. But now, he says, he only knows one thing for sure: "We have to make ourselves very flexible to quickly respond to an uncertain future."

Japanese car executives see this as the biggest crisis they've ever faced. "We must drastically change our way of thinking," says Toshihiko Sekine, Nissan's production-planning director. For starters, they vow to overhaul their much imitated "lean production" system, which uses low inventory, small-lot production, and rapid model replacement to produce cars that captivate customers. With growth stalled, some assumed advantages of lean assembly, such as its huge variety of models and options, now seem too costly. The world auto slump has also revealed a dirty little secret: Even the vaunted Japanese can become bloated. "What the Japanese auto companies did in the late 1980s, when they were rich, was squander much of their resources," contends Furman Selz Inc. auto analyst Maryann N. Keller.

With earnings flagging and No. 2 Nissan Motor Co. even sliding toward its first pretax loss in 45 years, the top priority of Japanese carmakers is to generate more profit at lower volumes. The companies are paring waste, shedding options, and even considering cutting out models. They're standardizing everything from chassis and axles to steering columns, and they may keep some models on the market longer to trim development costs. Already the world's low-cost producers, they're ferreting out lots of additional savings. All the while, they're reorganizing managements, rejiggering assembly lines, moving production offshore, and raising prices overseas to offset the high yen.

At least for now, all this could give a break to U.S. and European competitors. Future Japanese models are likely to have fewer engine and drivetrain options. Honda, for one, says it may not offer a V-6 engine as an option vs. the standard four on its revamped Accord next year (page 86). Some models, such as a 1993 successor to Nissan's Sentra, may debut later than expected. And sticker prices on Japanese models may rise faster--they're already up an average 2.7% in the U.S. for 1993, twice Detroit's increase. Japan's market share could fall if these trends keep up. "We've got to keep worrying about Japan," says a top Big Three executive, "but there's a difference between being worried and being scared to death."

For the Big Three, there's also irony in Japan's new tack. Steps such as stretching out product cycles will move the Japanese closer to Detroit's way of doing things. And if the Japanese misstep, they could replicate some of Detroit's more egregious errors. Too much standardization, for example, helped hobble General Motors Corp. in the 1980s, when it turned out lookalike models that turned off consumers. Some analysts believe Mazda has contracted a similar malady in Japan, where six of its models are essentially the same car with relatively minor body variations.

GIDDY MODELS. Western rivals also worry, however, that Japan's carmakers could roar back by the mid-1990s. "They have always come out of difficulties a little better, a little stronger," notes Philip E. Benton Jr., Ford's president. "We're expecting that again." Nissan, for one, is looking for a 30% productivity gain over three years. The companies still export nearly half the 13 million vehicles they produce annually in Japan, but that's changing as production and research are shifted offshore to ease trade friction. Toyota is doubling capacity at its Georgetown (Ky.) plant, to 400,000 vehicles annually, and Honda and Toyota are adding production in Britain. Much of the streamlining at home can be applied to these plants.

At the moment, a major problem complicates all this: overinvestment in factories in Japan. Collectively, the companies poured $34 billion into capital spending, much of it in Japan, in the three years that ended in March, 1992 (chart). With social pressures building for an improved Japanese lifestyle and the government calling for shorter workweeks, the companies figured they had to boost automation to keep factories humming. For instance, the 18% reduction in work hours the government is demanding from 1990 to 1994 is equal to a 723,500-unit annual cut in production at Toyota. But with local car sales off 12% since the 1990 peak of 5.1 million units, it may take years to bring plants such as Hofu up to full capacity.

Billions more may have been wasted on giddy new models and features, mainly for the Japanese market. Often, there was too little regard for assessing market prospects or costs. One result is the proliferation of options on models such as Nissan's Laurel, sold only in Japan. Aficionados can choose from 87 different steering-wheel sizes, colors, and other variations. "We thought customers wanted more choices," laments Hideaki Miyahara, a Toyota product manager. But it turns out that 80% of sales come from 20% of the combinations.

The streamlining that has followed is Japanese-style. In the place of U.S. slash-and-burn plant closings and layoffs, the Japanese hope that thousands of small changes will add up to big savings. The first major order of business is to reduce variations in product offerings, starting this year. Even No. 1 Toyota, which is weathering the downturn well, aims to cut color and option combinations by 20%. In Japan, for instance, its Camry Vista is now offered in only 64 combinations, down from 84 last year. Steering-wheel choices on next year's Nissan Laurel will drop from 87 to just 10. The changes are also hitting some models sold overseas. Starting this year, Mazda's RX-7 sports car has only one engine choice, not two.

Even greater gains are expected from wider use of common components, which cuts design time and expense. At Honda, 30% of the parts in the 1992 Civic came from the previous model, up from 10% before. More parts are being shared among different models, too. Take Honda's new Domani, a souped-up Civic for the Japanese market. Its body is new, but 60% of its value comes from existing parts such as the chassis, gearbox, and instrument-panel innards.

SAVINGS SCALPEL. Using a technique called "value analysis," a way of eking out savings in models already being produced, Japanese companies are also taking penny-pinching to a new plane. Here are a few examples from Toyota chief engineer Kiyokazu Seo. Hook up tail lights with one connector instead of two: savings, 42 cents. Make a smaller plastic clip to anchor the body's weatherstripping: a $1.05 savings. Instead of coating the car's entire underside with a sealing compound, seal only where needed: a huge $2 savings, despite the extra robot required. Toyota says such changes won't hurt quality; before, it says, it did more than was necessary.

Japan's other mantra these days is "value engineering"--taking a scalpel to waste at the design stage. It's an old technique for eking out dozens of tiny gains that Japanese companies are using with renewed vigor. Toyota, for example, has started injecting rubber into its brake boosters, the hydraulic cylinder that a brake pedal actuates, rather than inserting two pieces of rubber. Result: Subassembly time is down by 1 minute. Toyota now even cuts sheet metal for stamping to the centimeter, rather than leaving a tiny margin for trimming later.

Production lines are also being simplified. Nissan, for example, says it improved productivity a targeted 10% on 1993 models, mainly through seemingly mundane changes. Bolts on the engine mounts, gas tank, and radio that workers used to twist on from below are now tightened from above. Panels are marked to show where brake tubes and fuel hoses should be attached. And hooks now hold a car's air blower, heater, and sun visor so a worker can attach them with only one hand.

In some cases, the lessons the Japanese are learning will sound familiar to Detroit. For instance, Tadaaki Jagawa, Toyota's director of production control, says the company's new line at Kyushu, a southern island of Japan, won't use some of the highest-tech gear Toyota has experimented with. A $1.6 million automatic power-train inserter won't be installed because it's too expensive for what it does. Also due to be dropped: two of the four robots for affixing wheels, and driverless electric parts-delivery carts that play tinny classical music to warn workers they're coming.

Like GM, Toyota, it seems, has learned that "too much automation can backfire," Jagawa says. "If it's too complicated, workers are intimidated." Moreover, he adds, even a flexible automated system often can't beat real people, who continually improve quality with suggestions. GM made a similar discovery after spending some $80 billion on automation during the 1980s. One big difference: Toyota carefully proves out new technology before using it widely.

There are also similarities in the organizational changes being made in Japan and Detroit. Take Toyota and GM. In October, when Tatsuro Toyoda took over as Toyota's president, he divided the company into new departments based on vehicle type: front-wheel drive, rear-wheel drive, and four-wheel drive. Before the shakeup, pride and the seniority of competing team leaders sometimes kept the best ideas from prevailing. Ironically, GM just chose a similar structure for its domestic auto operation.

And Chrysler Corp. had best keep an eye on Honda. Chrysler reorganized its entire company in 1989 around Honda-style product development teams to speed up its development cycle. While the move is working so far for Chrysler, Honda is now reining in the once all-powerful project leaders who have typically shepherded its new models from conception to marketing. Kawamoto reorganized Honda and assigned Shinya Iwakura, a top executive, to coordinate among project leaders. Adding such a layer of management breaks all tenets of lean production, but Honda figured it had no choice. "Engineers had too much freedom," Iwakura says.

A special concern for the Japanese is maintaining the health of their financially strapped suppliers. That's crucial because Japanese carmakers contract out 70% of their parts production to 200 to 300 first-tier suppliers in a loosely knit keiretsu, or family of interdependent companies, and they in turn buy parts from subcontractors. Yet these days, even loyal suppliers like Yuji Shimizu, 60, the fifth-generation president of Shimizu Industries, a family-owned company west of Tokyo, say they now resist car companies' demands for price cuts. Those who don't risk red ink or even bankruptcy.

The auto makers are taking pains to keep key suppliers viable. As GM does in the U.S. and Europe, Toyota and others dispatch teams of engineers to help streamline parts makers' production lines. They also encourage the highest tier of companies to branch eut. Nissan wants each supplier to get 30% of its sales outside its keiretsu--twice as much as before. Auto makers want as many ties as possible to suppliers with the best prices and technology.

At the lowest end of the supply chain--the thousands of tiny family-run machine shops that are the shock absorbers of Japan's economy--quality is starting to suffer. President Takeshi Tanuma of Japan Electronic Control Systems, a controller and sensor maker near Tokyo, is monitoring 7 of his 130 small suppliers because their quality is suspect--something he has never resorted to before. He even added a final inspector at one, violating the spirit of lean production and boosting costs 2%. "If it happened to every supplier, it would wipe out my profits," Tanuma grimaces.

In the longer term, Japanese auto makers have another worry: Where are they going to find enough uorkers? The country's population is dropping, more young workers are shunning manual labor, and the government's drive to improve the quality of life is forcing a reduction in the hours that people work--all of which will worsen a chronic labor shortage.

GOOD BET. To keep current employees happy, the companies are not only paring hours but investing in amenities such as jazzier work uniforms and cleaner dormitories and better cafeteria food for employees and their families who live in company housing. On the newest production lines, individual dollies adjust a car's height at each workstation so an assembler doesn't have to bend over. There's evidence that such measures help reduce turnover. In its first year, no one quit Toyota's high-tech Tahara No. 4 line, 190 miles west of Tokyo, in contrast with a typical plant's first-year turnover of 25%.

Where will all this change lead? No matter how much Japan's car companies slash costs, they're likely to hurt financially for a couple of more years. Even Toyota, with 42% of Japan's car market, has suffered a two-thirds decline in operating margins over two years--to 2.1% for the fiscal year ended last June. Rivals such as Nissan and No. 4 Mazda are genuinely squeezed. Nissan is expected to post a pretax loss of $120 million for the year ending next March, on sales of $32.4 billion--its first such shortfall since 1946. On average, figures Koji Endo, an analyst in Tokyo with S.G. Warburg Securities (Japan) Inc., auto companies' operating margins have fallen to a measly 0.9%, the lowest level in half a century.

Given their past performance, however, it probably won't pay to bet against Japan's major auto makers for long. Research by a Harvard University team that surveyed 29 development projects for vehicles that hit the market between 1983 and 1987 found that Japanese companies develop a car in 1.7 million engineering hours over just 46 months--vs. 3 million engineering hours and 60 months for their Western counterparts. And the companies have gotten more efficient. For instance, when Chrysler took apart Honda's new Civic, which was revamped for the 1992 model year, it figured that the new model cost $700 less to build than the previous one. That's a boon for Honda, considering that the Civic sells for an average of $11,000, some $1,000 or so more than the previous version did.

Chrysler and one or two European companies seem to be narrowing the gap for now. But they'll have to keep up with Japan's latest moves or risk falling behind once again. Meanwhile, Japanese companies are quietly laying the groundwork for renewed expansion.

They plan to deal with overcapacity in Japan by shutting older plants and producing mainly high-sticker-price cars there for export, then shifting output of lower-end models overseas. As the big companies expand overseas, Kume predicts, they will create a system of global networks, with regions specializing and supplying one another. Engines built in Mexico, say, may be shipped to the rest of the world. Producing worldwide will help offset trade frictions and give the auto makers a presence in each market, the better to adapt products to local tastes. They also see new markets to conquer in Eastern Europe, Russia, and China, though protectionist measures will probably limit access there. "There are still many people left in the world who can enjoy cars," says Toyota Chairman Shoichiro Toyoda.

In short, Japan's auto industry is readying itself for slow growth but not for an end to expansion. And given the determination with which the companies are moving to adjust to the 1990s, it seems doubtful their current woes will keep them down long.Karen Lowry Miller in Tokyo, with David Woodruff in Detroit and Thane Peterson in New York